Great Fed Robbery of “We the People”
By the Curmudgeon with Victor Sperandeo
"There is no longer any independently determined investment strategy; everyone in the markets is just trying to follow the next turn in central bank policy," John Dizard wrote in this weekend's (March 28-29, 2015) Financial Times (on-line subscription required).
The Curmudgeon and Victor Sperandeo have been saying that for years, blaming the Fed for starting the central bank "game of thrones" - zero interest rate policies (ZIRP), massive quantitative easing (QE), and competitive currency devaluations (AKA "beggar thy neighbor"), negative interest rates in Europe, etc. in a futile attempt to boost flagging global economic growth.
After 6+ years, those easy money/gravy train policies have not accomplished their goal, as U.S. and global economic growth is way below the long term trend of 3% or more. Instead, the unconventional monetary policies have artificially inflated financial assets and real estate, while greatly penalizing savers. Those hurt the most are senior citizens, like the Curmudgeon, living off their dwindling savings (with negligible interest - see Wells Fargo rate quote below) to pay bills that continue to rise much faster than the rate of inflation (see Sidebar: Is Inflation Understated?).
This is one of the most carefully researched and comprehensive posts that Victor and I have ever written!
Fed Policy Robbing Savers & Causing Many Other Negative Effects:
In a landmark study released this week: Turn off the Money Tap - Our Economy is Drowning, Swiss Re reported that U.S. savers have lost a whopping $470 billion in interest rate income (net of lower debt costs) since the global financial crisis started in September 2008. [Please see Victor's comments below for his calculation of the interest theft, which is actually much greater than $470B.]
ZIRP and QE have ballooned the Fed's balance sheet past the $4.5 trillion mark, but have failed to generate above-trend economic growth or stimulate core inflation to rise to the Fed's 2% target. Victor has repeatedly stated that's because money is being hoarded by companies and banks due to a perceived stagnant/weak economy.
Swiss Re called the negative impact of low interest rate policies "indisputable” and cited a "domino effect." Their "must read" report states:
"When it comes to private households, low interest rates result in a "tax" on savers as they do not earn interest on deposits that they otherwise would. In the case of negative interest rates, they even experience a devaluation of their savings. In the U.S., that has added up to a loss in interest income of $470 billion since the financial crisis. Meanwhile, the rich have gotten richer – by $3.7 million for the top 1% of households. Since the wealthiest 1% of U.S. savers invest around 50% of their financial assets in equities, they have gained from the equity rally. In other words, financial repression has done nothing to address economic inequality1. Meanwhile, the impact of foregone interest income for households and long-term investors has become substantial."
1Financial repression has created and increased income inequality, according to many economic experts.
Echoing the Curmudgeon and Victor, the well-respected Swiss re-insurer writes: "This current state of financial repression brings with it a whole host of unintended consequences: asset price bubbles, an impaired credit intermediation channel and increasing economic inequality are just a few."
Please refer to many previous Curmudgeon posts on the Fed to learn of more negative effects. Our favorite Fed exposé: Is the Fed a No Risk Hedge Fund or a Ponzi Scheme?
"Financial repression is likely to remain a key tool for policymakers given the moderate global growth outlook and high public debt overhang. Whether the costs outweigh the benefits largely depends on the ability of governments to take advantage of the low interest rate environment by implementing the right structural reforms," Swiss Re wrote. "So far the record for doing so hasn't been comforting."
"Besides the impact on long-term investors' portfolio income, the consequence for capital market intermediation is not negligible either," Swiss Re CIO Guido Furer said in a statement. "Crowding out investors due to artificially low or negative yields will reduce the diversification of funding sources to the real economy, thus representing a risk for financial stability and economic growth potential at large."
"Keeping interest rates artificially low through official intervention hampers the ability of long-term investors to deploy risk capital into the real economy. It has broken the financial market intermediation channel by crowding out viable private markets, lowering the funds available from long-term investors to be used for the real economy," Swiss Re said. "Investments in infrastructure could repair this damage and address weak economic growth."
To illustrate "financial repression," below is a 222 year chart of U.S. interest rates (through 2013), compiled by Louise Yamada. From 1977 to 2013, Yamada used the yearly close for the 30-Year Treasury bond. For data from 1790 to 1976, she used prime corporate bond rates. All of her data are in nominal terms (i.e. not adjusted down during inflationary periods or up during deflationary periods).
If we were to update the chart, the yields would be LOWER during the last two years. For example, on January 30, 2015, the 30 year T Bond yield fell to 2.22% - an all-time low!
Corporate America takes advantage of low yields to boost profits, now declining:
U.S. companies have used low interest rates to borrow money and buy back their own shares and boost dividends, even though they have record cash hoards (often held overseas and untaxed). The rationale is to boost earnings per share, but that also contributes to reduced CAPEX and low top-line sales growth.
Despite 6+ years of ultra-easy (free) money and financial shenanigans/ accounting tricks by large corporations, S&P 500 earnings are now projected to decline (i.e. be negative) in the first and second quarters and grow just 0.3% in the third, according to S&P Capital IQ.
Analysts' consensus projects that S&P 500 earnings
will slump by almost 3% for the first quarter of 2015. All 10 recessions since
1945 were preceded by downward trending growth in earnings per share during the
previous 12-month period, said Sam Stovall, managing director of U.S. Equity
Strategy at S&P Capital IQ’s Global Markets Intelligence group.
-->Or is this time different? :-))
Victor's Incisive and On Target Comments:
The "Central Bank of Iraq Robbery” (3/19/03) was one of the greatest heists in history. About $1 billion was taken from Iraq's Central Bank by Saddam Hussein and his family, just hours before the United States began bombing Iraq, the U.S. State Department said on May 6, 2003.
On the day before the bombing of Iraq by coalition forces (mostly the U.S.) on March 19, 2003, Saddam Hussein sent his son Qusay to make a withdrawal from the Central Bank of Iraq. The process was simple, and bank personnel consented to the request because of fear. The 5-hour withdrawal period summed over $100 bills that amounted to over $1 billion.
Saddam’s theft was topped by a waiter named "Stephane Breitwieser," a certified art collector who became a thief. Since he began stealing paintings and other works of art in March 1995, Mr. Breitwieser successfully made off with over 239 pieces from over 172 museums worldwide, gaining a cumulative total of over $1.2 billion, before being caught in November of 2011.
Those combined two billion dollar plus thefts are a drop in the ocean compared with the Fed's rip-off of savers. As the Curmudgeon notes above, the Swiss-Re report calculates the FED's manipulated confiscation (in collusion with the U.S. Federal Government) of $470B of "We the People's" money since the financial crisis started in September 2008.
The Swiss Re interest rate theft estimate is deeply under-estimated, in my humble opinion. To get to the $470B estimate depends on what you believe interest rates should be, and the total level of savings in the form of cash equivalents held in safe short term debt instruments.
Since Dec 31 1925 - to - Dec 31 2008, the 30 day T-Bill rate compounded at 3.71% according to Ibbotson Associates, while inflation (CPI) was 3.01%. That produces a net real before tax return of +70 bps. Since September 2008, 30 day T-Bills have yielded 0.06 bps and the CPI was 1.8% for a net loss of (1.74%) which has compounded for 6 years and 2 months.
Further, I estimate that "total cash + short term interest bearing investments" total approximately $8 Trillion. That includes money market funds, CDs, cash in interest bearing checking and savings accounts, short term T-notes (2 years), short and ultra-short term Muni and Corporate bonds or funds, etc. At the historical 83 year compounded T bill yield of 3.70% x $8 Trillion in assets x 6.167 years comes to $1.83 Trillion. That's the MINIMUM savers should have received in before tax interest in the last 6.167 years (note that short term bonds and CDs always yield more than 30 day T bills).
Now, let's conservatively assume that the interest rate actually received on the $8 Trillion over those years was $800M, noting that most of people's savings is in money market funds, "high interest" savings accounts, CDs, etc. which yield much less than 1% annually (e.g. Wells Fargo's High Yield Savings account currently yields a miniscule 0.03%, with a $10 per month penalty if you don't maintain a $25,000 balance).
-->That's a total interest theft of $1 Trillion, which is more than DOUBLE Swiss Re's saver theft of $470B.
Points to Ponder:
Two important questions to think about now:
· Is it the people's responsibility to fund the two biggest borrowers in the U.S. - the government and corporate America - for 6.2 years at effectively zero interest rates?
· All in the failed cause of helping the economy grow?
According to the Taylor rule2, short term interest rates should be 2.0% (not 0.0002 bps).
2The Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions.
One can argue that after Lehman Brothers was allowed to fail in September 2008, a zero interest policy was justified to "save the U.S. from a depression." However, after the recession officially ended in June 2009, it seems unimaginable to maintain a "financial crisis" zero interest rate policy for even one additional year, let alone almost 7 years!
Sidebar: Is Inflation Understated?
Do you believe the CPI was only 1.8% annually since September 2008? Victor's equal weighted commodity index was +4.29% from 1/1/09 – to - 12/31/14. The Curmudgeon's bills are rising at close to 10% per year.
John Williams of Shadowstats (Curmudgeon and Victor are both subscribers) has repeatedly stated that inflation was much higher than the U.S. government reported numbers. For example, in a March 24, 2015 report to subscribers, Williams wrote:
"Inflation as viewed from the standpoint of common experience—generally viewed by the public in terms of personal income or investment use—continues to run well above any of the government’s rigged price measures. CPI reporting methodologies in recent decades deliberately were changed so as to understate the government’s reporting of consumer inflation, and that inflation-understatement fraud is being expanded. The pace of inflation has been understated, through politically-orchestrated efforts to adjust for economic substitutions in the CPI surveying (i.e., hamburger being purchased in lieu of more-expensive steak), and by not reflecting actual out-of-pocket costs in its surveying, with generally downside hedonic-quality adjustments made to prices, all as detailed in the Public Commentary on Inflation Measurement and as adjusted for in the ShadowStats Alternate Inflation Measures.
In a March 28th Financial Times article titled: Deflation:
the modern policy bogeyman, Gillian Tett calls
attention to a 2009 Bank of Japan study on deflation. After the lost decade of falling prices, the
results were quite unexpected: "44% of those surveyed deemed it favorable,
35% felt it to be neutral and 20.7% found it unfavorable." That's 79% of
the Japanese people liked stable or lower prices, and thought it was good or
Yet the Fed, ECB, JCB, etc. all use deflation as an excuse (or more accurately -a contrived sham) to keep rates low and do more QE?
From the above referenced FT article: "most western central banks are now engaged in a startling new fight to prevent deflation, almost at any cost. It is an accepted tenet of modern economics that deflation is a terrible scourge that must be avoided. Deflationary spirals and depressions, of the sort seen in America in the 1930s, are the nightmare that haunts the central banking world."
Ms. Tett then goes on to cite a BIS deflation study and states, "If the BIS paper is even half correct to point out that our modern terror of deflation is overblown, then there is a third important implication: the raison d’être of the current wild, radical monetary policy experiments is not nearly as compelling as it seems. And this is a thought-provoking idea to ponder, whatever you feel about that “d” word. Particularly in a week when men such as James Bullard, a Fed governor, have publicly warned that excessively loose monetary policy is now inflating gigantic asset bubbles. And it is fair bet that those asset prices will eventually tumble – creating the type of economic damage that gives deflation such a bad name."
Finally, to add insult to looting, Fed Queen Janet Yellen said at a March 27th conference in San Francisco: "the Fed planned to raise rates more slowly than in the past recoveries because of the unusually fragile condition of the American economy."
Yet after all the money printing, rounds of QE, borrowing, taxing, government giveaways (e.g. the amount of people receiving food stamps has grown at 7.5% a year since 2000-2013 or 17.2 million to 47.6 million), etc. the economy is STILL "too weak" to permit interest rates to be to be moved up at their normal historical pace?
This begs the question why the economy is so weak yet the stock market at all-time highs? The answer is clearly Obama's failed fiscal policies and the Bernanke/Yellen Fed egregious monetary policies which have benefited owners of financial assets at the expense of "we the people."
The U.S. government's abysmal fiscal and monetary policies
have caused a 2000 year old proverb to be turned upside down...Christian Bible,
Proverbs 22:7 says: "The rich rule over the poor, and the borrower is
servant to the lender"...which now should be rewritten: "the
politician/bureaucrat rules over the people; the lender and the servant to the
Till next time...
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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